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Maximize Your IRA Strategy

Published in Articles on April 15, 2017

How much do you know about your individual retirement account (IRA)? One of the most important features of your IRA is that it is an individual account. You can customize your deposits, take withdrawals when you want, and are responsible for paying any taxes or penalties on each distribution. You can also control what happens to your account after you die by designating beneficiaries.

As you determine your optimal IRA strategy, it is important to keep in mind a variety of laws applicable to both traditional and Roth IRAs. Each year, the Internal Revenue Service (IRS) sets annual contribution limits for both traditional and Roth IRAs (the combined annual limits in 2017 are $5,500 for those younger than age 50 and $6,500 for those age 50 or older). It is also important to recognize that the IRS sets IRA deduction limits each year. These limits are applicable to your traditional IRA contributions if you or your spouse is covered by a retirement plan at work, and your modified adjusted gross income exceeds a certain amount. Your income might also limit your allowable annual Roth contribution amount regardless of whether you or your spouse is covered by a retirement plan at work.

In addition to annual limits, you must also consider the limitations on both investments and transactions in your IRA. The penalties for disallowed investments and transactions in your IRA can be devastating. When in doubt, consult with your certified public accountant (CPA) and investment advisor about prohibited investments and transactions.

As you continue to develop your IRA strategy, it is helpful to understand all the options permitted under current tax law (e.g., nondeductible IRA contributions, Roth conversions, IRA rollovers, SIMPLE IRAs, SEP IRAs, inherited IRAs). Coordinating and optimizing the variety of available IRA strategies can be a highly complex process that requires careful, skilled attention throughout your investment lifecycle. Your individual circumstances, as well as continuing changes in tax law, need to be considered each year.

If understood and used correctly, an IRA can be a very valuable part of your long-term investment strategy. The tax laws governing IRAs can help you diversify taxation of your investments now and in the future. Everyone preparing for retirement should start by understanding the current and future tax treatment of all available types of investment accounts:

  • taxable brokerage accounts (e.g., joint, trust, and individual accounts)
  • tax-deferred accounts (e.g., 401(k), SEP IRA, SIMPLE IRA, and traditional IRA accounts)
  • tax-free Roth accounts (e.g., Roth 401(k) and Roth IRA accounts)

Each account type has tax advantages and disadvantages. For example, taxable brokerage accounts are funded with after-tax dollars, but the capital gains are taxed at preferential tax rates, and the taxable assets receive a basis adjustment to market value upon the death of the account holder. Traditional IRAs, in contrast, may be funded with pre-tax dollars (tax-deductible contributions) or after-tax dollars. All pre-tax IRA contributions and all IRA earnings are taxed at ordinary income-tax rates as assets are withdrawn from the account during retirement, whereas tax-free Roth accounts are funded with after-tax dollars and then grow tax-free. Keep in mind that tax-deferred accounts are subject to required minimum distribution rules starting at age 70½ years, but Roth accounts are not subject to these minimum distribution rules.

Ever-changing and increasingly complex tax laws make it very difficult to predict future tax rates. A sound strategy for accumulating and then spending retirement assets should include all three types of investment accounts as far as your circumstances and current tax law allow. Holding retirement assets in all three account types will allow you to coordinate and implement a strategy aimed at optimizing your after-tax income every year as you save and then spend your retirement assets. Strategically investing different types of assets within each account type is a key for retirement savers to optimize returns and tax savings.

Taxable brokerage accounts, tax-deferred accounts, and tax-free Roth accounts can all play significant roles in your overall retirement strategy. As you work to develop and then maximize your IRA strategy with the help of your CPA and financial advisor, make sure that you consider both the advantages and the disadvantages of each type of account available to you.

Aaron B. Sautter is a financial advisor with Onyx Financial Advisors, LLC, an independent, fee-only registered investment advisor firm in Idaho Falls, Idaho. He can be reached at (208) 522-6400 or at